UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Period Ended
September 30, 2004 Commission File No. 0-15807
MARKETSHARE RECOVERY, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 31-1190725
--------------------------------------- ---------------------------------
(State or jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
95 Broadhollow Road, Suite 101, Melville, NY 11747
-------------------------------------------- -----
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (631) 385-0007
Former name, former address and former fiscal
year, if changed since last report:
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for a shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
The number of shares issued and outstanding of the Registrant's Common Stock,
$0.10 par value, as of November 22, 2004 was 45,702,256.
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(Formerly Health & Leisure, Inc. and subsidiary)
INDEX TO FORM 10-QSB
--------------------------------------------------------------------------------
Page
PART I - FINANCIAL INFORMATION:
Item 1 - FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheet 1
Condensed Consolidated Statements of Operations 2-3
Condensed Consolidated Statements of Cash Flows 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5-12
MARKETSHARE RECOVERY, INC AND SUBSIDIARY
(FORMERLY HEALTH & LEISURE, INC. AND SUBSIDIARY)
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, 2004
--------------------------------------------------------------------------------
ASSETS
------
CURRENT ASSETS
Cash $ 41
Accounts Receivable 390
Marketable securities 21,392
Due From Affiliate 3,209
-----------
TOTAL CURRENT ASSETS 25,032
PROPERTY AND EQUIPMENT, Net 1,669
SECURITY DEPOSITS 4,667
TOTAL ASSETS $ 31,368
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES
Notes payable - stockholders $ 10,185
Loan Payable 100,000
Accrued expenses and other current liabilities 86,306
Deferred revenue 41,631
Due to stockholders 12,300
Accrued interest - stockholders 17,200
-----------
TOTAL CURRENT LIABILITIES 267,622
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred stock - $0.10 par value; 10,000,000 shares
authorized; no shares issues or outstanding --
Common stock - $0.10 par value; 50,000,000 shares
authorized; 45,702,756 shares issues and outstanding 4,570,276
Additional paid-in capital (2,690,106)
Accumulated deficit (2,116,424)
-----------
TOTAL STOCKHOLDERS' DEFICIENCY (236,254)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 31,368
===========
See notes to unaudited condensed consolidated financial statements.
1
MARKETSHARE RECOVERY, INC AND SUBSIDIARY
(FORMERLY HEALTH & LEISURE, INC. AND SUBSIDIARY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
--------------------------------------------------------------------------------
For the Nine Months Ended
September 30,
2004 2003
-----------------------------
NET REVENUES (including revenue from related party $ 244,728 $ 594,545
of $11,392 and -0-, respectively)
COST OF REVENUES (including compensatory element
of stock issuances of $40,331 and 0, respectively) 158,115 427,668
------------ ------------
GROSS PROFIT 86,613 (166,877)
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (including compensatory element of stock
issuances of $0 and 1,964,739, respectively) 136,099 2,107,789
------------ ------------
OPERATING (LOSS) INCOME (49,486) (1,940,912)
------------ ------------
OTHER (Expense)
Interest expense - stockholders (7,199) --
Loss on sale of marketable securities (45,049) (7,383)
Unrealized loss on marketable securities (1,851)
------------ ------------
TOTAL OTHER EXPENSES (54,099) (7,383)
------------ ------------
LOSS BEFORE INCOME TAXES (103,585) (1,948,295)
PROVISION FOR INCOME TAXES -- 9,000
------------ ------------
NET LOSS $ (103,585) $ (1,957,295)
============ ============
Basic Net (Loss) Per Common Share $ -- $ (0.40)
============ ============
Diluted Net (Loss) Per Common Share $ -- $ --
============ ============
Weighted Average Number of Common Shares
Outstanding - Basic (1) 45,650,180 6,181,466
============ ============
Weighted Average Number of Common
Shares Outstanding - Diluted (1) 45,650,180 6,181,466
============ ============
(1) Restated to reflect 1-for-10 reverse stock-split completed in August 2003.
See notes to unaudited condensed consolidated financial statements.
2
MARKETSHARE RECOVERY, INC AND SUBSIDIARY
(FORMERLY HEALTH & LEISURE, INC. AND SUBSIDIARY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
--------------------------------------------------------------------------------
For the Three Months Ended
September 30,
2004 2003
-----------------------------
NET REVENUES (including revenue from related party $ 16,504 $ 308,141
of $3,797 and -0-, respectively)
COST OF REVENUES 11,901 246,721
------------ ------------
GROSS PROFIT 4,603 61,420
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (including compensatory element
of stock issuances of $0 and 1,964,739, respectively) 16,035 2,029,807
------------ ------------
OPERATING (LOSS) INCOME (11,432) (1,968,387)
------------ ------------
OTHER INCOME (EXPENSES)
Interest expense - stockholders (265) --
Loss on sale of marketable securities (45,049) (24,227)
Unrealized loss(gain) on marketable securities 39,090 --
------------ ------------
TOTAL OTHER EXPENSES (6,224) (24,227)
------------ ------------
LOSS BEFORE INCOME TAXES (17,656) (1,992,614)
PROVISION FOR INCOME TAXES -- --
------------ ------------
NET LOSS $ (17,656) $ (1,992,614)
============================
Basic Net (Loss) Income Per Common Share $ (0.00) $ (0.12)
============================
Diluted Net (Loss) Income Per Common Share $ (0.00) $ (0.12)
============================
Weighted Average Number of Common Shares
Outstanding - Basic (1) 45,702,756 16,457,748
============================
Weighted Average Number of Common
Shares Outstanding - Diluted (1) 45,702,756 16,457,748
============================
(1) Restated to reflect 1-for-10 reverse stock-split completed in August 2003.
See notes to unaudited condensed consolidated financial statements.
3
MARKETSHARE RECOVERY, INC AND SUBSIDIARY
(FORMERLY HEALTH & LEISURE, INC. AND SUBSIDIARY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
--------------------------------------------------------------------------------
For the Nine Months Ended
September 30,
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (103,585) $ (1,957,295)
------------ ------------
Adjustments to reconcile net loss to net cash provided by operating
activities:
Compensatory element of stock issuances 40,331 1,964,739
Depreciation 439 --
Changes in operating assets and liabilities:
Accounts receivable (390) 6,385
Prepaid and other current assets (1,601) 1,567
Due to affiliate (3,886) --
Security deposits -- (4,667)
Accrued expenses and other current liabilities 59,306 (59,132)
Marketable securities 16,533 60,571
------------ ------------
TOTAL ADJUSTMENTS 110,672 1,969,463
------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 7,087 12,168
------------ ------------
CASH USED IN INVESTING ACTIVITIES
Purchase of property and equipment (2,108) --
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Note to Shareholders (114,815) --
Proceeds from loan payable 100,000 --
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (14,815) --
------------ ------------
(9,836)
12,168
CASH - Beginning 9,877 4,697
------------ ------------
CASH - Ending $ 41 $ 16,865
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:
Income taxes $ 455 $ 978
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
Issuance of notes payable related to reverse merger $ 137,700
Issuance of common stock to satisfy notes payable $ 12,700
See notes to unaudited condensed consolidated financial statements.
4
MARKETSHARE RECOVERY, INC AND SUBSIDIARY
(FORMERLY HEALTH & LEISURE, INC. AND SUBSIDIARY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 1 - Basis of Financial Statement Presentation
The unaudited condensed consolidated financial statements presented are
those of MarketShare Recovery, Inc. - Delaware (formerly Health & Leisure,
Inc.) and its wholly-owned subsidiary, MarketShare Recovery, Inc. - N.Y.
("MKSR"). Collectively, they are referred to herein as the ("Company").
The Company discontinued its operations on November 7, 2004 and is
seeking privately held businesses to complete a merger transaction with.
There is no assurance that the Company will be successful in locating a
candidate and completing a business combination.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial statements
and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and disclosures required for annual
financial statements. These financial statements should be read in
conjunction with the consolidated financial statements and related
footnotes included in MarketShare Recovery, Inc. and Subsidiaries (the
"Company") annual report on Form 10-KSB for the year ended December 31,
2003.
In the opinion of the Company's management, all adjustments (consisting
of normal recurring accruals) necessary to make the presentation of the
Company's financial position as of September 30, 2004 and the results of
operations and cash flows for the nine month periods ended September 30,
2004 and September 30, 2003 have been included.
The results of operations for the nine-month period ended September 30,
2004 are not necessarily indicative of the results to be expected for the
full year ended December 31, 2004.
NOTE 2 - Business and Reverse Merger
Effective on June 13, 2003, Health & Leisure, Inc. ("HLLS"), a
publicly-traded Delaware corporation, and its wholly-owned subsidiary,
Venture Sum, Inc., a Delaware corporation ("Mergerco"), entered into a
Merger and Acquisition agreement with MKSR, a privately-held New York
corporation, in the business of providing on-line direct marketing
solutions for enterprises to customers through the United States.
Pursuant to the agreement, Mergerco merged with and into MKSR and MKSR
became the surviving corporation. As consideration for the merger, the
shareholders of MKSR received from HLLS 1,019,767 common shares of HLLS
and 3,425,000 shares of its voting convertible non-cumulative preferred
stock ("HLLS Preferred Stock"). 267,000 shares of the HLLS common stock
issued to the MKSR shareholders were from HLLS authorized but unissued
shares and 752,767 shares of the HLLS common stock were returned to HLLS
by the HLLS' former chief executive officer (Mr. Feldman) and then
reissued by HLLS in the merger.
5
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(Formerly Health and Leisure, Inc. and subsidiary)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 2 - Business and Reverse Merger, continued
The 3,425,000 shares of HLLS Preferred Stock are convertible into
34,250,000 post reverse stock-split shares of HLLS common stock upon
approval of an increase in the shares the Company is authorized to issue.
After the issuance of common stock as described above and the conversion
of HLLS Preferred Stock, the shareholders of MKSR own approximately 94%
of HLLS. Accordingly, this transaction has been accounted for as a
reverse merger with MKSR as the acquirer of HLLS. The reverse merger was
accounted for as a recapitalization and the stockholders' equity was
retroactively restated to January 1, 2002. The historical financial
statements prior to the reverse merger are those of MarketShare Recovery,
Inc. - N.Y.
Pursuant to the merger, the Company's former Chief Executive Officer
cancelled all indebtedness owed by HLLS to him, except for $12,700, and
cancelled all guarantees of debt by HLLS.
In addition, as part of the merger transaction, MKSR and HLLS agreed to
pay $125,000 to H&L Concepts, Inc., a wholly-owned subsidiary of HLLS.
After the execution of the promissory note, the former Chief Executive
Officer purchased all of the outstanding shares of stock of H&L Concepts,
Inc. for nominal consideration. The parties acknowledged that most of the
trade payables and other consolidated liabilities of HLLS were
liabilities of H&L Concepts, Inc., the subsidiary of HLLS, and by selling
the stock of H&L Concepts, Inc. to Mr. Feldman it had the effect of
removing substantially all of the trade payables and liabilities from the
HLLS balance sheet and fixing the post closing liabilities of HLLS to
that set forth in the promissory note, see Note 5.
NOTE 3 - Going Concern and Management's Plans
The accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with accounting principles generally
accepted in the United States of America, assuming that the Company will
continue as a going concern. For the nine months ended September 30,
2004, the Company has incurred a loss of approximately $104,000 and has a
working capital deficiency of approximately $243,000. These factors raise
substantial doubt about the Company's ability to continue as a going
concern. The Company's ability to continue as a going-concern is
dependent upon obtaining additional financing, restructuring its existing
liabilities, and the successful completion of its business plan. The
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty. No assurance can be
provided that the Company will be successful in locating additional
financing or completing its business plan.
6
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(Formerly Health and Leisure, Inc. and subsidiary)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies
Principles of Consolidation
-----------------------------
The unaudited condensed consolidated financial statements include the
accounts of MarketShare Recovery, Inc. - Delaware (formerly Health &
Leisure, Inc.) and its wholly-owned subsidiary, MarketShare Recovery,
Inc. - N.Y. All significant intercompany balances and transactions have
been eliminated in consolidation.
Revenue Recognition and Related Commission Expenses
----------------------------------------------------
Revenues include the sale of and/or electronic delivery of email
distribution lists. Revenues from the sale of email distribution lists
are recognized when the seller has delivered a list to the customer and
the customer has accepted the list after an up to 30-day address
replacement period. Revenues from consulting services are recognized
ratably over the period of the contract. Commissions due to sales
consultants are initially deferred and recognized ratably over the period
revenue is recognized. Deferred commission expense is netted against
deferred revenue for financial reporting purposes.
Use of Estimates
----------------
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash or Cash Equivalents
------------------------
For the purpose of the statements of cash flows, the company considers
all highly liquid debt investment purchased with a maturity of three
months or less to be cost equivalents.
Website Development Costs
---------------------------
The Company recognizes the costs associated with developing a website in
accordance with the American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use".
Relating to website development costs the Company follows the guidance
pursuant to the Emerging Issues Task Force (EITF) No. 00-2, "Accounting
for Website Development Costs". Internal costs related to the development
of website content are expensed as incurred. As of September 30, 2004,
there are no capitalized website development costs.
Advertising Costs
-----------------
Advertisement costs are expensed as incurred. For the nine months ended
September 30, 2004 and 2003, advertising expenses were $2,500 and $0,
respectively.
7
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(Formerly Health and Leisure, Inc. and subsidiary)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies, continued
Marketable Securities
---------------------
On certain engagements, the Company receives shares of common stocks of
publicly-traded corporations from its customers in lieu of cash payments
for services rendered. The fair value of the common stocks received is
reflected as revenue. Subsequently, these marketable securities are
classified as trading securities and reported at fair value with
unrealized gains or losses reported as other income (expenses) in the
statements of operations except for securities related to commissions
amounting to $0 during 2004. Unrealized gains or losses related to
marketable securities to be transferred to sales consultants as
commissions are reflected as an increase or decrease in the accrued
commission liability.
Loss or Earnings per Common Share
---------------------------------
The Company displays earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share".
SFAS No. 128 requires dual presentation of basic and diluted earnings per
share. Basic earnings per share include no dilution and is computed by
dividing the net income (loss) by the weighted average number of common
shares outstanding for the period. Diluted earnings per share include the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. During
the nine months ended September 30, 2004 and 2003, there were no
potentially dilutive securities excluded from the calculation.
Stock-Based Compensation
-------------------------
The Company follows SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes accounting and reporting
standards for stock-based employee compensation plans. This statement
allows companies to choose between the fair value-based method of
accounting as defined in this statement and the intrinsic value-based
method of accounting as prescribed by Accounting Principles Board Opinion
No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
The Company has elected to continue to follow the accounting guidance
provided by APB 25, as permitted for stock-based compensation relative to
the Company's employees. Stock and options granted to other parties in
connection with providing goods and services to the Company are accounted
for under the fair value method as prescribed by SFAS No. 123.
8
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(Formerly Health and Leisure, Inc. and subsidiary)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies, continued
Stock-Based Compensation, continued
-------------------------------------
In December 2002, the Financial Accounting Standard Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of SFAS Statement No. 123". This statement
amends SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value-based method of accounting for
stock-based employee compensation. In addition, SFAS No.148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS No. 148 also requires that those
effects be disclosed more prominently by specifying the form, content,
and location of those disclosures. The Company adopted the increased
disclosure requirements of SFAS No. 148 during the year ended December
31, 2003. The Company has no stock-based employee compensation.
NOTE 5 - Note Payable - Stockholders
At the closing of the merger, HLLS and MKSR entered into a $125,000
secured promissory note with H&L Concepts, Inc., a then wholly-owned
subsidiary of HLLS. The loan is payable in twelve equal installments of
$11,341, commencing July 2003. Interest is included in the monthly
payment at a rate of 16% per annum. In October 2003, Mr. Ray Barton and
Mr. Tim Schmidt, the Company's current executive officers and directors
purchased the promissory note from H&L Concepts, Inc. for the full value
of the note, in accordance with the terms of the note. The terms of
repayment, including the interest rate and payment schedule are the same.
During the nine months ending September 30, 2004 the company repaid
$114,500 in Principal. At September 30, 2004 the amount due to these
stockholders and accrued interest amounted to $10,185 and $17,200,
respectively.
NOTE 6 - loan Payable
As of September 30, 2004, the Company had a $100,000, 8% note, due within
one year, payable to a third party, secured by an interest in the public
shell of MarketShare Recovery for future acquisitions.
9
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(Formerly Health and Leisure, Inc. and subsidiary)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 7 - Stockholders' Deficiency
Preferred Stock
---------------
In June of 2003, HLLS amended its designation of preferred stock and
designated 3,425,000 shares of HLLS Preferred Stock. Each share of HLLS
Preferred Stock is automatically convertible into 10 shares of common
stock upon filing of an amendment to HLLS certificate of incorporation
authorizing a sufficient number of shares of common stock to effect such
a conversion. The HLLS Preferred Stock shall be entitled to receive when,
if and as declared by the Board of Directors dividends at 6% of its par
value per annum, payable in cash. Dividends on each share of the HLLS
Preferred Stock shall be non-cumulative and shall not accrue if not
declared. Each share of the HLLS Preferred Stock shall entitle its
holders to vote in all matters submitted to a vote of the stockholders of
the Company with the number of votes per Preferred share equal to the
number of votes available on a converted basis.
As discussed in Note 2, in connection with the June 2003 merger
transaction with MKSR, 3,425,000 shares of the HLLS Preferred Stock were
issued to the stockholders of MKSR. In September 2003, these preferred
shares were converted into 34,250,000 shares of common stock.
Changes in Capital Structure
----------------------------
On August 5, 2003, HLLS filed with the Securities and Exchange Commission
a definitive information statement notifying the stockholders of the
Company that written consents from principal stockholders who
collectively hold in excess of 50% of the Company's common stock were
obtained and approved a 1 for 10 reverse split of the HLLS common stock,
to authorize up to 50,000,000 shares of HLLS common stock and to change
the name of HLLS to MarketShare Recovery, Inc.
The 1-for-10 reverse stock split became effective on August 29, 2003 and
the $12,700 of debt owed to the former Chief Executive Officer was
converted into 1,270,000 shares of common stock and the 3,425,000 shares
of HLLS Preferred Stock was converted into 34,250,000 shares of common
stock. All share and per share amounts in the consolidated financial
statements and notes thereto, were retroactively adjusted to reflect the
reverse stock split.
Stock Options
-------------
In September 2003, the Company adopted a 2003 Stock Option Plan (the
"2003 Plan"). Under the 2003 Plan, up to 15,000,000 incentive stock
options, or non-qualified stock options, could be granted to employees
and consultants. As of September 30, 2004, no options have been granted.
Common Stock Issuances
----------------------
During the nine months ended September 30, 2004, the Company issued
287,650 shares of its common stock to two officers of the Company as
additional compensation valued at $40,271 charged to operations for the
nine months ended September 30, 2004. The Company also issued 36,000
shares of its common stock to HLLS in connection with the merger recorded
at par value in the statement of stockholders' deficiency. In addition
the Company issued 500 shares to an individual valued at $60 charged to
operations for the nine months ended September 30, 2004.
NOTE 8 - Concentrations of Credit Risk
Revenue from four customers accounted for approximately 37% and 0%,
respectively for the nine months ended September 30, 2004 and 2003.
There were no revenues from any customer amounting to 10% or more of the
total net revenues for the nine months ended September 30, 2004.
10
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(Formerly Health and Leisure, Inc. and subsidiary)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 9 - Commitments and Contingencies
Lease Obligations
-----------------
Beginning January 1, 2004, the Company entered into a sub lease agreement
with 110 Media Group, Inc and Subsidiaries (formerly known as Dominix)
("110 Media Group") to share the expense of office facilities occupied by
them jointly under a lease held by the Company. The agreement includes
future minimum rental payments to be received amounting to approximately
$16,000 per annum through March 2008.
Rent expense charged to operations for the nine months ended September
30, 2004 and 2003 amounted to $9,376 and $13,469, net of sub rental
income from 110 Media Group amounting to $9,376 and $-0-, respectively.
NOTE 10 - Related Party Transactions
Deferred Revenue
----------------
The Company entered into a database license agreement with 110 Media
Group to use and to sublicense the use of its database for a term of ten
years. For financial reporting, revenue is recognized using the
straight-line method, based upon the economic useful life of three years.
At September 30, 2004, deferred revenue was $41,631.
NOTE 11 - Terminated Proposed Merger
110 Media Group, Inc.
---------------------
On November 25, 2003 110 Media Group, Inc a Delaware corporation traded
on NASDAQ electronic bulletin board (OTEN) and the Company entered into a
Stock Purchase Agreement (the "Stock Purchase Agreement") under which 110
Media Group, subject to certain conditions, would acquire all of the
outstanding capital stock of MKSR. The parties have determined that it is
in their mutual best interest to terminate the Stock Purchase Agreement.
In March 2004, the Company entered into a database license with Jade
Entertainment Group, Inc. ("Jade"), a wholly owned subsidiary of 110
Media Group (see Note 10).
NOTE 12 - Subsequent Event
Asset Purchase Agreement
------------------------
On October 7, 2004, the Company entered into an Asset Purchase Agreement
with Palomar Enterprises, Inc. (the "Agreement"). Pursuant to the
Agreement, the Company agreed to purchase certain assets, including
certain automotive notes and contracts, a business plan and model for an
automotive financial services company and a data base of potential
customers and $150,000 in cash from Palomar in exchange for 646,117
shares of the Company's Common Stock and 1,000,000 shares of the
Company's Series A Preferred Stock. Each share of Series A Preferred
Stock will convert into 65 shares of the Company's Common Stock.
11
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(Formerly Health and Leisure, Inc. and subsidiary)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 12 - Subsequent Event, continued
Concurrently with the execution of the aforementioned Agreement, the
Company's officers and directors have agreed to sell to Palomar
twenty-nine million (29,000,000) shares of the Company's Common Stock for
$150,000. In the event the transactions discussed above are consummated,
Palomar Enterprises and its affiliates will own approximately 85% of the
issued and outstanding shares of the Company's Common Stock.
On November 2, 2004, by mutual agreement, the Company and Palomar
terminated the Agreement. The Company's officers and directors along with
Palomar agreed to terminate their agreement as well. There will be no
change of control of the Company.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS; MARKET DATA
The discussion in this report on Form 10-QSB contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding our expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in this document
are based on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. Our actual results
could differ materially from those described in our forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, our unproven business model and a limited operating history in a
new and rapidly evolving industry; our ability to implement our business plan;
and our ability to manage our growth, retain and grow our customer base and
expand our service offerings.
We make forward-looking statements in the "Management's Discussion and Analysis
of Financial Condition and, Results of Operations" below. These forward-looking
statements include, but are not limited to, statements about our plans,
objectives, expectations, intentions and assumptions and other statements that
are not historical facts. We generally intend the, words "expect",
"anticipate", "intend", "plan", "believe", "seek", "estimate" and similar
expressions to identify forward-looking statements.
This Quarterly Report contains certain estimates and plans related to us and
the industry in which we operate, which assumes certain events, trends and
activities will occur and the projected information based on those assumptions.
We do not know that all of our assumptions are accurate. In particular, we do
not know what level of growth will exist in our industry, if any, and
particularly in the foreign markets in which we operate, have devoted resources
and in which we shall seek to expand. If our assumptions are wrong about any
events, trends and activities, then our estimates for future growth for our
business may also be wrong. There can be no assurances that any of our
estimates as to our business growth will be achieved.
The following discussion and analysis should be read in conjunction with our
financial statements and the notes associated with them contained elsewhere in
this quarterly report. This discussion should not be construed to imply that
the results discussed in this quarterly report will necessarily continue into
the future or that any conclusion reached in this quarterly report will
necessarily be indicative of actual operating results in the future. The
discussion represents only the best present assessment of management.
Pursuant to an Acquisition Agreement and Plan of Merger dated June 13, 2003
(the "Merger Agreement"), by and among Health & Leisure, Inc (the
"Registrant"); Venture Sum, Inc., a Delaware corporation and a wholly owned
subsidiary of Registrant ("Mergerco"); and MarketShare Recovery, Inc., a New
York corporation, ("MKSR"), Mergerco merged with and into MKSR, and MKSR became
a wholly-owned subsidiary of the Registrant. The merger became effective June
13, 2003, (the "Effective Date,") however closing of the Agreement occurred on
July 15, 2003. Subsequently, Health & Leisure, Inc. filed an amendment to its
certificate of incorporation and thereby changed its name to MarketShare
Recovery, Inc.
Our operating subsidiary similarly named MarketShare Recovery, Inc. was
incorporated in New York in November 2000. The subsidiary, MarketShare
Recovery, Inc. is a provider of online direct marketing solutions for
enterprises. Our solutions enable corporations to create and deliver online
direct marketing programs that drive revenue, influence behavior and deepen
customer relationships. Our solutions provide customer insight and powerful
program execution through a combination of hosted applications and technology
infrastructure.
We derive our revenues from the sale of solutions that enable businesses to
proactively communicate with their customers online. Primarily, these services
have consisted of the design and execution of online direct marketing campaigns
and additional services provided by our Professional Services organization,
including the development and execution of Customer Acquisition programs.
Revenue for direct marketing and acquisition campaigns are recognized when
persuasive evidence of an arrangement exists, the campaign has been sent, the
fee is fixed or determinable and collection of the resulting receivables is
reasonably assured. Revenue generated by our professional service organization
is typically recognized as the service is provided.
Our ability to grow and operate our existing business has been constrained by
new technologies and e-mail filtering devices installed at internet service
providers and on consumers personal computers. These programs block our emails
form reaching their final destination, which in turn is affecting our ability
to effectively market our services. These technological obstacles have been put
in place to combat spam however their effect has been more widespread and has
adversely affected our ability to deliver our clients messages to our opt-in
database of users. As a result, we are finding it harder to maintain and grow
our business as we are not able to deliver as many advertisements for our
clients and in turn are having difficulty in recruiting new sales persons as
well as retaining members of our existing sales force.
13
As a result of the foregoing, we decided to discontinue our existing business
and sought out new business opportunities. On October 7, 2004, the Company
entered into an Asset Purchase Agreement with Palomar Enterprises, Inc. (the
"Agreement"). Pursuant to the Agreement, the Company agreed to purchase certain
assets, including certain automotive notes and contracts, a business plan and
model for an automotive financial services company and a data base of potential
customers and $150,000 in cash from Palomar in exchange for 646,117 shares of
the Company's Common Stock and 1,000,000 shares of the Company's Series A
Preferred Stock. Each share of Series A Preferred Stock will convert into 65
shares of the Company's Common Stock.
Concurrently with the execution of the aforementioned Agreement, the Company's
officers and directors have agreed to sell to Palomar twenty-nine million
(29,000,000) shares of the Company's Common Stock for $150,000. In the event
the transactions discussed above are consummated, Palomar Enterprises and its
affiliates will own approximately 85% of the issued and outstanding shares of
the Company's Common Stock.
On November 2, 2004, by mutual agreement, the Company and Palomar terminated
the Agreement. The Company's officers and directors along with Palomar agreed
to terminate their agreement as well.
As a result of the foregoing, there will be no change of control of the Company
as reported in the Company's Form 8-K filed with the SEC on October 13, 2004.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and the related disclosures. A summary of
those accounting policies can be found in the footnotes to the consolidated
financial statements included elsewhere in this report. Certain of our
accounting policies are considered critical as they are both important to the
portrayal of our financial condition and results of operations and require
judgments on the part of management about matters that are uncertain. We have
identified the following accounting policies that are important to the
presentation of our financial condition and results of operations.
REVENUE RECOGNITION
Revenue recognition. We generate revenue from the sale of solutions that enable
businesses to proactively communicate with their customers online.
MarketShare Recovery applies the provisions of Staff Accounting Bulletin 104
"Revenue Recognition" and recognizes revenue when persuasive evidence of an
arrangement exists, the service has been delivered, the fee is fixed or
determinable and collection of the resulting receivables is reasonably assured.
Customer Marketing revenues are recognized upon sending of the campaigns.
Revenues attributable to one-time set-up fees for service initiation are
deferred and recognized ratably over the term of the client's service
agreement. Customer Acquisition revenues are derived primarily from programs
that assist clients in marketing their respective products or services.
Customer Acquisition programs fall into two general categories: CPM mailing
programs and CPA campaign programs. CPM mailing programs involve the execution
and delivery of email campaigns to a defined number of individuals based on a
fixed fee per number of e-mails delivered. The CPM, which stands for cost per
thousand will vary based on the specificity of the demographic to whom the
campaign is delivered to. CPA campaign programs are performance based campaigns
which involve the execution and delivery of email campaigns wherein we are paid
either a flat fee of a percentage of a successful sale or acquisition of a
customer by one of our clients.
We assess probability of collection based on a number of factors, including our
past transaction history with the customer and the credit-worthiness of the
customer. New customers and certain existing customers may be subject to a
credit review process which evaluates the customers' financial position and
ultimately their ability to pay according to the original terms of the
arrangement. Based on our review process, if it is determined from the outset
or during the term of an arrangement that collection of the resulting
receivable is not reasonably assured, then revenue is recognized on a
cash-collected basis.
14
RESULTS OF OPERATIONS
The following table includes consolidated statements of operations data for the
nine months ended September 30, 2004 and 2003 expressed as dollar amounts and
as a percentage of revenues.
Nine Months Nine Months
Ended September 30 Ended September 30
2004 2003 2004 2003
--------- --------- ------ ------
% %
Revenues
Net Revenue $ 244,728 $ 594,545 100.00 100.00
---------- ----------- ---------- ----------
Total Net Revenue 244,728 594,545 100.00 100.00
Cost of Revenue
Officer Compensation 40,331 103,544 16.47 17.41
Salesmen Commissions 117,784 324,124 48.12 54.51
---------- ----------- ---------- ----------
Total cost of revenues 158,115 427,668 64.60 71.92
---------- ----------- ---------- ----------
Operating Expenses
Selling, general and
administrative 135,660 143,050 55.43 24.06
Compensatory Element of
stock issuance -- 1,964,739 -- 330.46
Depreciation 439 0 0.17 0.00
---------- ----------- ---------- ----------
Total operating expenses 136,099 2,107,789 55.60 354.52
---------- ----------- ---------- ----------
Operating Loss
Other Income (Expense)
Interest Expense-stockholders (7,199) 2.94 0.00
Loss on sale of marketable
securities (45,049) (7,383) 15.49 1.24
Unrealized Loss on
marketable securities (1,851) 3.66
---------- ----------- ---------- ----------
Total Other Expenses (54,099) (7,383) 22.10 1.24
---------- ----------- ---------- ----------
(Loss) Income Before Taxes (103,585) (1,948,295) 42.32 327.70
---------- ----------- ---------- ----------
Provision For Income Taxes 0 9,000 0.00 3.00
---------- ----------- ---------- ----------
Net (Loss) Income $ (103,585) $(1,957,295)
========== ===========
15
COMPARISON OF NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
Our net revenues decreased by 59% from $594,545 for the nine months ended
September 30, 2003 to $244,728 for the nine months ended September 30, 2004.
The decrease in revenues is due to our reduced outside sales force consisting
of experienced salesmen with proven sales experience. Cost of revenues as a
percent of net revenues decreased from 72% of net revenues for the nine months
ended September 30, 2003 to 64% of net revenues for the six months ended June
30, 2004. The decrease in cost of revenues is due to lower commission rates
paid to the outside sales force and reduction in services.
Selling, general and administrative expenses decreased by 5% from $143,050 for
the nine months ended September 30, 2003 to $136,099 for the nine months ended
September 30,2004 this decrease is due to a reduction of services and decision
to discontinue existing operations.
Other expenses increase by 46,718 from $7,383 for the nine months ended
September 30, 2003 to $54,099 for the nine months ended September 30, 2004.
This increase is attributed to both the realized and unrealized loss on the
sale of marketable securities.
COMPARISON OF QUARTERS ENDED SEPTEMBER 30, 2004 AND 2003
Our net revenue decreased by 95% from $308,141 for the three months ended
September 30, 2003 to $16,504 for the three months ended September 30, 2004.
The decrease in revenues is due to our reduced outside sales force consisting
of experienced salesmen with proven sales experience. Cost of revenues as a
percent of net revenues decreased from 80% of net revenues for the three months
ended September 30, 2003 to 72% for net revenues for the three months ended
September 30, 2004. The decrease in cost of revenues is due to lower commission
rates paid to the outside sales force and decision to cease existing
operations.
Selling, general and administrative expenses decrease by 76% from $65,608 for
the three months ended September 30, 2003 to $16,035 for the three months ended
September 30, 2004. This decrease is due to reduction of services offered and
the decision to to discontinue existing operations.
Other expenses decreased by 75% from $(24,227) for the three months ended
September 30, 2003 to $(6,224) for the three months ended September 30, 2004.
This decrease is due to the sale of maketable securities.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities during the nine months ended September
30, 2004 amounted to $7,087 compared to $12,168 during the nine months ended
September 30, 2003. The decrease in cash is due to the reduction of services
offered and the decision to discontinue existing operations.
Cash used in investing activities during the nine months ended September 30,
2004 amounted to $2,108 compared to $0 during the nine months ended September
30,2003. The company purchased computer equipment necessary for expanding our
direct marketing capabilities in order to meet customer demands.
Cash used in financing activities during the nine months ended September 30,
2004 amounted to 14,815 compared to $0 during the nine months ended September
30, 2003. The company received an advance from a third party to secure the
public shell of MarketShare Recovery. In addition the company repaid amounts
due to shareholders who guaranteed a $125,000 secured promissory note with H&L
concepts.
Beginning in 2004 the Company expanded the manner in which it can accept
payment from customers, previously we only accepted cash, like cash instruments
and company checks. During 2004 we were able to accept payment by all major
credit cards, by phone and have implemented an auto-draft system which is a
billing system which allows us to directly debit funds from customers bank
accounts.
Throughout 2003 and for the nine months ended September 30, 2004 the Company
made significant upgrades to its database and emailing technology. Despite our
effort to upgrade our systems, we have been unable to keep up with new
technologies and e-mail filtering devices installed at Internet service
providers and on consumers personal computers. These new technologies have
severely affected our ability to effectively market our services. As a result,
we have ceased operations and sought out new business opportunities. To that
end, we entered into an Asset Purchase Agreement with Palomar Enterprises.
In view of our accumulated deficit and recurring losses, our independent
registered public accouting firm have added an explanatory paragraph to their
report on our December 31, 2003 financial statements stating that there is
substantial doubt about our ability to continue as a going concern. In this
regard, management adopted the plan to cease operations and seek out new
business opportunities development of our video and website product lines as
well as seeking additional capital through the private sale of our debt or
equity securities. There is no assurance that we will complete the acquisition
or that its business will achieve profitable operations. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
16
We expect to fund operations on a minimal basis until we complete the
transaction described above. There is no assuarance that this transaction will
be consummated. We do not currently have adequate cash reserves to continue to
cover such anticipated expenditures and cash requirements. These factors, among
others, raise substantial doubt about our ability to continue as a going
concern.
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to income tax and marketing related agreements with our
affiliates. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
ITEM 3. CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures designed to ensure that
information required to be disclosed by us in the reports filed under the
Securities Exchange Act, is recorded, processed, summarized and reported within
the time periods specified by the SEC's rules and forms. Disclosure controls
are also designed with the objective of ensuring that this information is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Based upon their evaluation as of the end of the period covered by this report,
our chief executive officer and chief financial officer concluded that, if we
are able to successfully address the material weaknesses in our internal
accounting controls as discussed below, our disclosure controls and procedures
are effective to ensure that information required to be included in our
periodic SEC filings is recorded, processed, summarized, and reported within
the time periods specified in the SEC rules and forms.
Our board of directors were advised by Marcum & Kliegman, LLP, our independent
registered public accounting firm, that during their performance of review
procedures related to MarketShare Recovery's unaudited interim financial
statements for the quarter ended September 30, 2004 Marcum & Kliegman LLP
identified two material weaknesses, as defined in Public Company Accounting
Oversight Board Standard No. 2, in our internal control over financial
reporting as follows:
o Insufficiently skilled personnel compounded by a lack of human
resources and expected near-term significant turnover within our
accounting and financial reporting function. Also, we must improve
controls surrounding adequate monitoring and oversight of the work
performed by accounting and financial reporting personnel.
o Insufficient analysis, documentation and review of the selection
and application of generally accepted accounting principles to
significant non-routine transactions, including the preparation of
financial statement disclosures relating thereto.
We have assigned a high priority to the short-term and long-term improvement of
our internal control over financial reporting. Actions to address the material
weaknesses described above that we will undertake, or have undertaken, include
the following among others:
o We periodically review staffing of our accounting and financial
reporting functions to ensure appropriate staffing and supervision
of those functions. In January 2004, we hired a new controller. In
August 2004, based on an evaluation of our existing accounting
resources, management developed a plan to restructure the accounting
and financial reporting function. This plan includes both the
addition of new resources and the replacement of certain existing
resources. At that time, we began recruiting efforts for various
positions within our accounting department. In September 2004, and
after details of the restructuring plan became known to members of
our accounting staff, our controller announced his resignation. In
September 2004, we hired an outside consultant as a replacement.
o During the fourth quarter of 2004, we will continue our internal
control review process to remediate the internal control material
weaknesses identified above by Marcum & Kliegman LLP.
Other than regarding the material weaknesses discussed above, there have been
no changes in our internal control over financial reporting during the period
covered by this report that significantly affect our control environment.
17
In addition to the matters discussed above, the independent registered public
accounting firm responsible for the audit of MarketShare's financial statements
as of and for the year ending December 31, 2004 must attest to and issue a
report on management's assessment of the design and operational effectiveness
of our internal control over financial reporting. Although we intend to conduct
a rigorous review of our internal control over financial reporting to help
achieve compliance with the Section 404 requirements of the Sarbanes-Oxley Act,
if our independent registered public accounting firm is not satisfied with our
internal control over financial reporting or with the level at which it is
documented, designed, operated or reviewed, they may decline to attest to
management's assessment or may issue a qualified report identifying either a
significant deficiency or a material weakness in our internal controls. This
could result in significant additional expenditures responding to the Section
404 internal control audit, a diversion of management attention and potentially
an adverse reaction to our common stock in the financial markets.
LIMITATIONS OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, including our chief executive officer and chief financial
officer, does not expect that our disclosure controls or internal control over
financial reporting will prevent all errors or all instances of fraud. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system's objectives will
be met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and any design may
not succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or
procedures. Because of the inherent limitation of a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On October 7, 2004, the Company entered into an Asset Purchase Agreement with
Palomar Enterprises, Inc. (the "Agreement"). Pursuant to the Agreement, the
Company agreed to purchase certain assets, including certain automotive notes
and contracts, a business plan and model for an automotive financial services
company and a data base of potential customers and $150,000 in cash from
Palomar in exchange for 646,117 shares of the Company's Common Stock and
1,000,000 shares of the Company's Series A Preferred Stock. Each share of
Series A Preferred Stock will convert into 65 shares of the Company's Common
Stock.
Concurrently with the execution of the aforementioned Agreement, the Company's
officers and directors have agreed to sell to Palomar twenty-nine million
(29,000,000) shares of the Company's Common Stock for $150,000. In the event
the transactions discussed above are consummated, Palomar Enterprises and its
affiliates will own approximately 85% of the issued and outstanding shares of
the Company's Common Stock.
On November 2, 2004, by mutual agreement, the Company and Palomar terminated
the Agreement. The Company's officers and directors along with Palomar agreed
to terminate their agreement as well.
As a result of the foregoing, there will be no change of control of the Company
as reported in the Company's Form 8-K filed with the SEC on October 13, 2004.
ITEM 6. EXHIBITS
(a) Exhibits
31.1 Chief Executive Officer's Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer's Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MARKETSHARE RECOVERY, INC.
Date: November 22, 2004
By: /s/ Raymond Barton
---------------------------------------------
Raymond Barton, Chief Executive Officer
Date: November 22, 2004
By: /s/ Timothy Schmidt
---------------------------------------------
Timothy Schmidt, Chief Financial Officer
20